Minimum Support Prices for Agricultural Produce

Getting it wrong on India’s level of agricultural support

Note4Students

From UPSC perspective, the following things are important :

Prelims level : OECD

Mains level : Paper 3- Issue of negative support given to farmers as per OECD methodoloy

As per the OECD methodology, Indian farmers received negative support of Rs. 1.62-lakh crore in 2019, which implies that the government is taxing the farmers. But there are pitfalls in the methodology. The article explaines them.

The issue of support given to the farmers

  • Many media reports, based on data by the Organisation for Economic Co-operation and Development (OECD), have stated that the support provided to Indian agriculture is extremely low or negative, and, therefore, net taxed.
  • The OECD has estimated that Indian farmers received negative support to the extent of minus ₹2.36-lakh crore and minus ₹1.62-lakh crore in 2010 and 2019, respectively.
  • Surprisingly, the negative support of minus ₹1.62-lakh crore as estimated by the OECD was higher than the total budgetary allocation of the Ministry of Agriculture at ₹1.09-lakh crore in 2019.

Issues with the OECD estimates

  • Expenditure on the PM-KISAN, the National Food Security Mission, crop insurance, input subsidies such as fertilizer and electricity, are some of the measures covered under the 2019 OECD estimates.
  • However, the expenditure related to the operation of minimum support price and general services is not covered by it.
  • Despite the overall negative support, the expenditure of the Central and State governments on agriculture has increased substantially since 2000.
  • This support increased from ₹1.61-lakh crore to ₹3-lakh crore, between 2015 to 2019, registering 85% growth.
  • The massive negative market price support to the producers of different products has resulted in the total negative producer support, overshadowing the increase in the budgetary support over the years.

Market Price Support as per OECD methodology

  • The market price support of a commodity is calculated by multiplying its total production with the gap between the domestic price and international prices in a relevant year.
  • This methodology assumes that in case there is no government intervention in the agriculture market, then the domestic and international price of a product will converge, resulting in no gap in prices.

Why there is a focus on the price gap in OECD methodology

  • The OECD assumes government interventions lead to a gap between the international and domestic prices.
  • However, even if the government does not implement any program, the gap can still arise due to domestic and international factors.
  • Changes in supply and demand conditions in the domestic and international market due to shocks, depressed international prices due to subsidies given by other countries, among other factors, can generate a gap.

3 Consequence of OECD’s Market Price Support methodology

  • 1) If the domestic price for a product is less than its international price, then support for that product would be negative.
  • 2) A negative market price support for a product in one year can turn into huge positive support in another year on account of the relative movement of domestic and international prices.
  • 3) Even if in a particular year, the government does not provide any additional support compared to a previous year, the level of support calculated by the OECD can change.
  • This will arise if there is a change in either the gap between the domestic price and international price for a commodity, or its production, in the two years.
  • Given the unpredictability in the inherent data, the total support can move from huge negative to huge positive.

Concerns for India

  • For India, the negative support as a percentage of the total value of agriculture production has substantially reduced in recent years.
  • It is possible that support to Indian farmers in the near future becomes one of the highest in the world due to pitfalls in the OECD methodology.
  • This might set alarm bells ringing, particularly in the developed countries, which may aggressively question India’s support measures.

Consider the question “As per the OECD methodology, net support provided by Indian government to its farmers is negative for the year 2019. However, India’s expenditure on agriculture is consistently rising. What explains this conundrum? What are the concerns for India in the price support method of OECD?”

Conclusion

Rather than being swayed by the OECD numbers suggesting negative support, farmers, policymakers, and other stakeholders need to understand the pitfalls and limitations in the underlying methodology. This will help in providing a more correct perception of the level of support to agriculture in India.

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